I’d bet there’s a significant portion of college graduates who don’t understand their taxes, not to mention those who never went to college… Just on taxes related to college education, how many don’t understand what their 529’s can be used for besides tuitions, how should they deal with 1098-T’s, and so on? The understanding of taxes isn’t static either. There’re changes almost every year.
That’s no surprise. I see posts on this website all the time declaring that their bachelors degree in computer science will get them some kind of huge rich salary out of college. “Should I choose between Purdue or UCLA?” “Don’t worry, I’ll be rich enough to pay the $200,000 back.” They don’t realize that the “bucks” come long after their student loans are paid off. Entry and early professionals make a modest salary, because they don’t have the kind of experience that the “big bucks” people make. Employers don’t hire people because they’re smart, they hire people that can do the job.
Don’t worry…there’s a looming recession. That does the best job bringing them back down to earth.
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I think calling this is a “study” is not an accurate description. A website called Real Estate Witch claims to have surveyed 1000 college students and posted results of that survey. They give little detail beyond that. The results of this survey don’t make sense and are dramatically inconsistent with previous year’s surveys that were done before becoming Real Estate Witch. The website may have simply made up numbers to get traffic .
For example, in the previous year the survey found the following. This seems not unreasonable to me.
2021 Humanities majors expected $44k
2021 Accounting majors expected $57k
2021 CS majors expected $69k
In the recent survey, the numbers changed to bizarre results that do not make sense:
2022 Accounting majors expect $111k
2022 Humanities majors expect $106k
2022 CS majors expect $96k
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Considering that 77% of American taxpayers choose to give the government an interest-free loan each year instead of taking a few minutes to adjust their allowances, it’s clear that many parents who are college grads, let alone 22-year-olds, don’t know tax and personal finance basics (or they’re lazy). You’re also spot-on about 529s and 1098-Ts. I’ve spent hours reading up on options, when a scholarship becomes subject to the kiddie tax, etc., and I still learn something new each time I dig into things. A tax topic that appears simple can quickly turn into a 4- or 5-figure error with one wrong step.
I used to do a multi-week lesson on that at the end of 8th grade, which also helped the students learn Excel and PowerPoint. It wasn’t part of the curriculum, but I thought it was important and the principal let me do it after state testing. But those two words…state testing…are probably one of the biggest reasons why projects like that don’t happen as often as they should. It’s not on state testing, there’s no AP test to get college credit, and conspiracy theorists might also think that there are powerful “those” who don’t want people to have a good grasp of consumer finance. Thus, far too often, it isn’t taught.
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In retrospect, I agree that stating that college graduates are off by $50K or 88% are meaningless numbers. But as @blossom pointed out, I think it is directionally correct.
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Our school requires this of Juniors. They have to pick a field they are interested in, find real starting salary numbers and utility costs, find ads for apartments, cars, clothes, food, etc, to create their budget. It’s a very worthy assignment opening many eyes.
A good lesson, but an equally good lesson is another one our Gov’t teacher includes with her classes. First she asks students their thoughts about taxes (inevitable answer about them being too high). Then she lists out a lot of things govt’s do from the military to roads to food inspections to helping older folks (includes federal, state, local, and SS items, etc) and asks kids how they feel about each one. Rarely is there a majority wanting a cut in anything.
It helps them feel better about where their tax money is going. It’s easy to hate “taxes,” but far less easy to want many of the things the money is used for eliminated.
It’s actually after I heard her talk about that lesson that I quit being annoyed about our taxes. I like knowing I support many of these things - and I let myself think the things I wouldn’t want to support aren’t where “my” money is being used since mine isn’t enough to cover everything. 
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I’d expect that HS students could not find anything to cut from government spending, but with maturity and experience I think most will come to find that government spending is very inefficient and open to criticism.
Military spending is one example. While I agree that military spending is very important, I also feel that military spending by the US is excessive, inefficient, and and way too large.
Social Security is another topic that will some day be addresses. As I approach retirement age I find it absurd how much money was taken out versus what my benefit is. Not to mention that all the money no longer exists (lockbox? Please!).
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It’s a Government class. They talk about all of that too.
What I wrote about is her opening day for that section of the class. It helps kids learn to think about the subject instead of naturally assuming all taxes = bad. She does a great job teaching the class, not just that segment. Students love her and many lament that they don’t know which way she, herself, votes. She addresses issues from both sides. They have to think to figure out their own thoughts.
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Another example is health care in the US, where spending (both government / tax-supported and private) is extremely high compared to that in other rich countries, but health outcomes are no better, except perhaps for the top end of the income and wealth scale.
Social Security has always been a pay-as-you-go system where current payers of payroll taxes pay for the benefits of current retirees, rather than an actual pension plan accounted as a pension plan. So all of your payroll taxes paid for previous generation retirees’ benefits, and your benefits will be paid for by later generation workers’ payroll taxes.
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Charles Ponzi, 1882-1949
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Social Security has many characteristics of a Ponzi scheme, but it differs in two critical ways:
- The benefits any specific person gets is subject to renegotiation.
- The government has the absolute ability to tax in order to make current payments.
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Having the capacity to understand something doesn’t necessarily mean you do. If you are not interested or do not want to take the time, you likely won’t understand a given subject. To me, if you can graduate college (have the needed candle power, discipline, focus, reading comprehension, etc) you can understand basic taxes. Doesn’t mean you will though.
For most people, taxes are not very complicated. You have a W-2 (maybe two or even three). Maybe some savings (bank accounts or mutual funds). And given the number of people who surveys show would struggle to cover a relatively small emergency, there are a lot of people with no investments.
Surveys I have seen indicate that most people do not know what a 529 plan is. Fewer people actually fund one. And many of the people who do don’t have enough to cover tuition so the nuances what constitutes a qualified education education expenses aren’t on the table. Its if your 529 plan is fully funded that you are typically looking to max out eligible expenses (but that further distances you from most people).
Yes, tax laws change routinely. But for most people its inflation adjustments to rates and standard deductions that are relevant. Those changes do not change your understanding of tax laws.
@colonelmike64 If you are looking at tax rules relating to college and 4/5 figure errors with one wrong step, you are nowhere near the majority of people.
I think the issue with taxes is its the meeting of 3 big stumbling blocks. One, dealing with the government. Most people fear that. Two, finances. As noted, financial literacy in the US is worse than horrible for far too many people. And that works to their detriment in a significant number of ways. Three, math. Many people run from anything that involves math. Even basic arithmetic.
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1000% We have multiple degrees between us and rely on tax professionals for our businesses. We once had to hire two firms (two CPAs and two attorneys at different firms) to get to the bottom of a business sale with stock. We even need a pro when we both worked for companies. Very few people understand taxes and finance even those who are in the field often rely on others to check things. And the ramifications of being wrong can be awful.
And to add to Saillakeerie’s excellent point-
Four- Loss Aversion- a well documented phenomenon in Behavioral Economics. So a modest wage earner would rather pay H&R Block to file the taxes and know that he or she is getting “EVERY LAST PENNY” in the refund due (i.e. not leaving anything on the table) vs. doing the taxes themselves and realizing that there are four or five things they could be doing to increase their monthly paycheck.
I have friends who moonlight as tax preparers and even they think it’s tragic when they realize how focused people are on “getting my refund right now” vs. maximizing their overall financial picture.
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Yes, a large percentage of people have simple income tax calculations. However, the large number of possible calculations that do not apply to them but are referred to in tax forms and instructions may be intimidating to some people.
Note that tax programs typically default to “interview” style input, rather than just presenting a form for you to fill in directly and ensuring that the math is correct for calculated values, probably because the form is too intimidating.
Of course, some of the complexity in the income tax system comes from politicians discovering that making a special interest subsidy a tax credit, deduction, or special lower rate tends to make it more permanent then if the same amount of money were a government spending item. Ending a tax credit, deduction, or special lower rate is “raising taxes”, while ending a government spending item is “ending wasteful government spending”, so you can see which will face more opposition.
Being able to understand taxes and basic financial literacy are completely two different things. My S, for example, had taken courses in basic personal finance in HS and more sophisticated finance courses in college. He and a couple of his classmates together won some prize about a year ago. For whatever reason, the sponsor of the competition deposited the check to his account. He and his friends had enough tax-savviness to know that they needed to pay taxes on the prize, but they had no idea how to split it up, because each of them was likely to be subject to different rate of taxes (they all had different levels of earnings from internships, etc. and different tax filing statuses).
I don’t want some school telling my child how to investment their money. What gives them the right to indoctrinate kids with investments and how money should be handled.
My company pays 100% of my health insurance costs.
I agree! After all the government will take care of all their needs 